Equity LifeStyle Properties, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The company is a REIT focused on manufactured-home communities, RV resorts and campgrounds, with 404 properties and approximately 149,448 sites. Results are seasonal; transient RV revenue is particularly sensitive to weather and travel patterns.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $241.6m | $226.2m | $695.3m | $656.4m |
| Consolidated net income | $54.9m | $46.8m | $162.4m | $144.8m |
| Net income available to common stockholders | $48.5m | $41.0m | $144.9m | $127.1m |
| Diluted earnings per share | $0.56 | $0.48 | $1.66 | $1.49 |
| FFO per common share and OP unit | $0.90 | $0.83 | $2.71 | $2.49 |
| Normalized FFO per common share and OP unit | $0.91 | $0.83 | $2.72 | $2.50 |
FFO and normalized FFO are non-GAAP measures and should not be treated as substitutes for GAAP earnings or operating cash flow. Common distributions declared were $0.488 per share for Q3, versus $0.425 a year earlier; the nine-month amounts were $1.463 and $1.275, respectively.
- Property operations: Core Portfolio operating revenue, excluding right-to-use deferrals, increased 7.0% in Q3 and 5.6% for the nine months. Core property operating income, excluding deferrals and property management, rose 7.2% and 5.2%, respectively. Core manufactured-home occupancy was 94.3% in Q3, versus 93.5% a year earlier.
- Cash flow: Nine-month operating cash flow was $305.5m, compared with $274.6m. Investing cash outflow was $138.2m and financing cash outflow was $146.3m; cash increased $21.1m to $77.4m. Capital improvements were $87.9m.
- Debt and liquidity: At September 30, mortgage debt, net, was $1.982bn and the term loan was $199.5m. Cash was $77.4m, including $5.3m of restricted cash; management cited $72.1m of available cash and a fully available $400m credit line. Mortgage debt had a 4.8% weighted-average rate for the nine-month period and maturities from 2018 to 2041. The company reported compliance in all material respects with debt covenants.
Changes versus the prior comparable period
- Q3 revenue and net income available to common stockholders increased year over year; nine-month diluted EPS increased from $1.49 to $1.66.
- Growth in community rents reflected rate increases and occupancy gains. Core Portfolio average monthly community rent per site was approximately $615 in Q3, compared with $591 a year earlier. Core RV revenue increased 5.8% in Q3, with seasonal revenue up 18.7%.
- Property operating and maintenance expense rose, including hurricane restoration costs, payroll and utility expense. Q3 Core Portfolio expenses excluding deferrals and property management increased 6.8%.
- New-home sales volume declined: 173 in Q3 versus 207, and 413 for nine months versus 508. Nine-month rental operations income, net of depreciation, decreased to $24.3m from $24.6m.
- Mortgage debt, net, increased from $1.892bn at year-end 2016. The company redeemed its 6.75% Series C preferred stock for approximately $138.4m, including accrued dividends, in September.
Outlook, commentary and risks
- No specific earnings or FFO guidance is provided in the filing. Management said available cash, operating cash flow and credit-line capacity should meet near-term needs, including distributions, and described expected liquidity as adequate.
- After quarter-end, the company refinanced $194.2m of loans due in 2018 with a $204m Fannie Mae facility, fixed at 3.97% and maturing in 2037; it incurred approximately $2.2m of prepayment penalties. On October 27, it extended its $400m unsecured line of credit to 2021 and its $200m term loan to 2023, with variable LIBOR-based spreads, and incurred approximately $3.6m in fees. It also approved a new ATM equity program of up to $200m.
- Hurricane Irma: The company recorded $3.7m of estimated or completed damage and restoration expense and a $3.5m insurance-recovery accrual. It expected further costs or recoveries but could not estimate the total. Two Florida Keys RV resorts were awaiting restoration of utility service before reopening.
- Legal and regulatory matters: A civil investigation by California district attorneys concerning alleged asbestos and hazardous-waste violations remained unresolved; the company could not predict the outcome or reasonably estimate a possible loss. California rent-control litigation and ordinary-course utility, environmental, permitting and tax matters also remain relevant. Management said other proceedings collectively were not expected to represent a material liability.
- Key disclosed risks include occupancy and rent growth, weather and transient-customer demand, home-sale conditions and limited manufactured-home financing, acquisition integration, interest rates and refinancing access, potential equity dilution, and litigation outcomes. Management noted that transient revenue is the most volatile revenue stream.
Important facts for investors to verify
- Actual insurance recoveries and total repair costs from Hurricane Irma, including reopening status and operating effects at the Florida Keys resorts.
- Progress and potential financial exposure from the California district-attorney investigation and other legal or regulatory proceedings.
- Debt maturity, refinancing and interest-rate exposure after the October transactions, including facility covenants, fees and future financing costs.
- Whether rental-rate and occupancy gains continue to exceed property expense growth, and whether weaker home-sale volumes persist.
- The impact of the expanded ATM equity program and any future share issuance on dilution and per-share results.
- Management’s evaluation of upcoming accounting standards; the filing said the 2018 revenue-recognition adoption was not currently expected to have a material impact, but the assessment was not final.